Future Returns: Investing in Volatile Times

It’s no understatement to say the stock market in recent weeks has been on a roller coaster of ups and downs. Among factors giving investors the jitters has been the U.S. Federal Reserve’s stance on interest rate hikes.

In December, the Federal Reserve raised short-term rates by 0.25%, to a range between 2.25% and 2.50%, and Fed Chairman Jerome Powell indicated two rate hikes were likely in 2019 given what the Fed believes will be a reasonably strong economy in the U.S. this year.

Markets that were already stumbling on worries about trade troubles with China, interest rate hikes, the Fed’s unwinding of its balance sheet, and political tensions—all amid what seemed to be signs of a slowing economy—added to losses that had been mounting before the Fed’s announcement.

But Powell gave a different impression of his views on Friday, indicating during a conference in Atlanta that the Fed is paying attention to the volatility in the markets, and will be cautious about raising rates in 2019. U.S. stocks rose more than 3% on the news.

What does all this mean for investors? David Bailin, Citi Private Bank’s chief investment officer, counsels clients to “safeguard” their portfolios by adding higher quality investments, and by diversifying globally.

How Investors Can Safeguard Assets

“We want to make portfolios stronger and we want to have more diversification at the same time. What do we mean by stronger? For fixed-income, we don't want to be exposed to all areas of the market, we want to stay with higher quality credits.

“On the equity side, what we want to do is identify areas of the market where we want to be exposed to what we think will be continuous earnings growth in spite of the fact that the economy may slow down. A great example would be healthcare, where earnings typically grow through a recession or slow down very consistently.

“The last thing is that we would start to reduce exposure to certain sectors. (An example) would be U.S. small capitalization stocks, which has been a high performance class. The indebtedness (of small caps) is higher and we don't want to be as exposed during an economic cycle."

Why it’s Important to Not Time the Market

“You have bad (market) years, but you have many more good years. And you have more surprising good years versus more surprising bad years. That explains why you shouldn’t market time—over time, you have more positive than negative surprises, and you don’t know when they will happen.

“I always jokingly tell people that if markets go up over time, which they do, you have to be in them for those days. Right? If you missed the positive big days, you essentially hurt your portfolio.”

Express a Point of View Through an “Opportunistic” Portfolio

“We know from prior slowdowns that there will be mispricings in the market and in credit. If a client today invested in U.S. Treasuries, for example, because they were concerned (about the economy) and then were willing to trade opportunistically into an asset that was mispriced, we would like that idea.

“Suppose you invested money in your opportunistic portfolio every time the stock market was down 20%, and you moved it to your core portfolio until a new equity high was reached. What would happen? (If your opportunistic portfolio represented 20% of your holdings). Every five years you’d make an extra 3%.”

Strategies for Wealthy Investors

“A lot of clients are undertaking hedging activities or buying structured notes to change the actual risk profile of their portfolios. A client can buy a principal-protected note where they will know they're going to get their money back in exchange for a percentage of the upside in a given market. The risk is with the underwriter, which is what we saw in 2008. For those principal-protected guarantees to be there, the bank (that underwrites them) has to be creditworthy.

“We sold, in 2018, about $3.75 billion worth of those structured products that change the risk profile of the portfolio. It takes the market timing decision somewhat out of the equation and it means that you can stay more invested or be more disciplined about investing. It just helps you do that.”

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